Do Business School Ethics Lead to Financial Industry Scandals?

The financial sector has had a difficult time getting any positive press recently following the LIBOR scandal, loss of customer funds at PFG, hidden losses at JPM and money-laundering at HSBC. As we wait to see what criminal activity pops up next week, one has to question why so many of these illegal actions seem centered around business and finance. Luigi Zingales, a professor at the University of Chicago Booth School of Business poses the related question, Do Business Schools Incubate Criminals? In his view, the manner by which ethics are taught might suggest these actions are reasonable. Acknowledging this deficiency, Zingales provides a potential solution:

The way to teach these ethics is not to set up a separate class in which a typically low-ranking professor preaches to students who would rather be somewhere else. This approach, common at business schools, serves only to perpetuate the idea that ethics are only for those students who aren’t smart enough to avoid getting caught.

Rather, ethics should become an integral part of the so- called core classes -- such as accounting, corporate finance, macroeconomics and microeconomics -- that tend to be taught by the most respected professors. These teachers should make their students aware of the reputational (and often legal) costs of violating ethical norms in real business settings, as well as the broader social downsides of acting solely in one’s individual best interest.

Of course, no amount of instruction can prevent some people from engaging in bad behavior. It can, however, contribute to a social consensus that would discourage diffuse fraud, like the widespread misreporting of Libor rates or the willful self- delusion and dishonest dealing that helped turn the subprime crisis into a global financial disaster. The daily scandals that expose corruption and deception in business are not merely the doing of isolated crooks. They are the result of an amoral culture that we -- business-school professors -- helped foster. The solution should start in our classrooms.